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fundamentals of corporate finance 10th

Questions and Answers of Fundamentals Of Corporate Finance 10th

Calculating Project NPV Carlsberg is considering a new retail lager investment in Copenhagen.Financial projections for the investment are tabulated here. The Danish corporate tax rate is
per cent and the investment is depreciated using 20 per cent reducing balances. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows
Calculating Project Cash Flow from Assets In the previous problem, suppose the project requires an initial investment in net working capital of €2,000 and the investment will have a market value of
NPV and Accelerated Depreciation In the previous problem, suppose the investment is depreciated using the reducing balance method at 25 per cent per annum. All the other facts are the same. What is
Calculating Project NPV You have been appointed by a retail store as its new financial manager. The firm has opened a new store in the south of France that is specifically targeted at holiday makers.
Project Evaluation Dog Up! Franks is looking at a new sausage system with an installed cost of €390,000. This cost will be depreciated straight-line to zero over the projects five-year life, at the
Bid Price Blue Operations plc needs someone to supply it with 150,000 cartons of machine screws per year to support its manufacturing needs over the next 5 years, and you’ve decided to bid on the
Project Evaluation Your firm is contemplating the purchase of a new £925,000 computer-based order entry system. The system will be depreciated using the 20 per cent reducing-balance method over its
Calculating EAC A five-year project has an initial fixed non-current asset investment of £270,000, an initial NWC investment of £25,000, and an annual OCF of −£42,000.The non-current asset is
Calculating EAC Machine A costs £10,000 and costs£3,000 per year to maintain. It is expected to last 3 years.Machine B costs £8,000 and costs £5,000 per year to maintain. It is expected to last 2
Calculating a Bid Price Alson Enterprises needs someone to supply it with 185,000 cartons of machine screws per year to support its manufacturing needs over the next 5 years, and you’ve decided to
Cost-Cutting Proposals Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for £560,000 is estimated to result in £210,000 in
Comparing Mutually Exclusive Projects Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs 430,000 Norwegian kroner (NKr), has a
Calculating a Bid Price Consider a project to supply 100 million postage stamps per year to the Royal Mail for the next 5 years. You have an idle parcel of land available that cost £2,400,000 5
pence per stamp, and you have fixed costs of £950,000 per year. If your tax rate is 34 per cent and your required return on this project is 12 per cent, what bid price should you submit on the
Interpreting a Bid Price In the previous problem, suppose you could keep working capital investments down to only £25,000 per year. How would this new information affect your calculated bid price?
Comparing Mutually Exclusive Projects Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs £2,900,000 and will last for 6 years. Variable
Equivalent Annual Cost Compact fluorescent lamps(CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60 watt incandescent light bulb costs £0.50 and
Break-Even Cost The previous problem suggests that using CFLs instead of incandescent bulbs is a no-brainer.However, electricity costs actually vary quite a bit, depending on location and user type
Break-Even Replacement The previous two problems suggest that using CFLs is a good idea from a purely financial perspective unless you live in an area where power is relatively inexpensive, but there
Issues in Capital Budgeting The debate regarding CFLs versus incandescent bulbs (see Problems 9.36?9.38) has even more wrinkles. In no particular order:Incandescent bulbs generate a lot more heat
Replacement Decisions Your small remodelling business has two hydrogen-battery/petrol hybrid eco-vehicles. One is a small passenger car used for jobsite visits and for other general business
Calculating Project NPV With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a surf lifestyle for the home.
Project Evaluation Aguilera Acoustics (AA) projects unit sales for a new seven-octave voice emulation implant as follows:Year Unit sales 1 85,000 2 98,000 3 106,000 4 114,000 5 93,000 Production of
Calculating Required Savings A proposed cost-saving device has an installed cost of £360,000. The device will be used in a five-year project and be depreciated using the reducing balance method at
Calculating a Bid Price Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price.
Calculating a Bid Price Your company has been approached to bid on a contract to sell 10,000 voice recognition (VR) computer keyboards a year for 4 years.Because of technological improvements, beyond
Replacement Decisions Suppose we are thinking about replacing an old computer with a new one. The old one cost us €650,000; the new one will cost €780,000. The new machine will be depreciated
What is the payback period of the project?
What is the profitability index of the project?
What is the IRR of the project?
What is the NPV of the project?
What is forecasting risk? Why is it a concern for the financial manager?
What are some potential sources of value in a new project?
What are scenario, sensitivity and simulation analysis?
What are the drawbacks to the various types of what-if analysis?
How are fixed costs similar to sunk costs?
What is net income at the accounting break-even point? What about taxes?
Why might a financial manager be interested in the accounting break-even point?
If a project breaks even on an accounting basis, what is its operating cash flow?
If a project breaks even on a cash basis, what is its operating cash flow?
If a project breaks even on a financial basis, what do you know about its discounted payback?
What is operating leverage?
How is operating leverage measured?
What are the implications of operating leverage for the financial manager?
What is capital rationing? What types are there?
What problems does capital rationing create for discounted cash flow analysis?
Scenario Analysis Suppose you think that the unit sales, price, variable cost and fixed cost projections given here are accurate to within 5 per cent. What are the upper and lower bounds for these
Break-Even Analysis Given the base-case projections in the previous problem, what are the cash, accounting and financial break-even sales levels for this project? Ignore taxes in answering.
Calculating Costs and Break-Even Rolling Stone (RS)quarries quartz. The variable materials cost is €2.28 per unit, and the variable labour cost is €5.12 per unit.(a) What is the variable cost per
Computing Average Cost Makaveli SpA can manufacture mountain climbing shoes for €24.86 per pair in variable raw material costs and €14.08 per pair in variable labour expense. The shoes sell for
Scenario Analysis You have been given the following figures to assess the viability of a new portable hospital scanner. It is expected you will capture 10 per cent of the total market of 1.1 million
Sensitivity Analysis and Break-Even A retail clothing firm is evaluating the development of a new range of allweather coats. These coats contain an internal solar battery to provide heating whenever
Scenario Analysis A retail clothing firm is evaluating the development of a new range of all-weather coats. These coats contain an internal solar battery to provide heating whenever the garment is
Calculating Break-Even L.J.s Toys just purchased a£200,000 machine to produce toy cars. The machine will be fully depreciated using 20 per cent reducing balances over its five-year economic life.
Calculating Break-Even In each of the following cases, find the unknown variable.Accounting break-even Unit price(£)Unit variable cost(£)Fixed costs (£)Depreciation 212,800 41 30 820,000 ?165,000
Calculating Break-Even You are considering investing in a company that cultivates abalone for sale to local restaurants. The discount rate for the company is 15 per cent, the initial investment in
Using Break-Even Analysis Consider a project with the following data: accounting break-even quantity = 15,500 units; cash break-even quantity = 13,200 units; life = 5 years; fixed costs = £140,000;
Calculating Operating Leverage At an output level of 100,000 units, you calculate that the degree of operating leverage is 3.40. If output falls to 80,000 units, what will the percentage change in
Leverage In the previous problem, suppose fixed costs are £130,000. What is the operating cash flow at 58,000 units? The degree of operating leverage?
Operating Cash Flow and Leverage Bellstar manufacturing is planning a restructuring of operations.The company has fixed costs of £320,000 per year. The operating cash flow at 20,000 units is
Cash Flow and Leverage At an output level of 10,000 units, you have calculated that the degree of operating leverage is 2.1. The operating cash flow is £43,000 in this case. Ignoring the effect of
Leverage In the previous problem, what will be the new degree of operating leverage in each case?
Break-Even Intuition Consider a project with a required return of R per cent that costs £I and will last for N years.The project uses straight-line depreciation to zero over the N-year life; there
Sensitivity Analysis Consider a project to supply Italy with 40,000 tons of machine screws annually for automobile production. You will need an initial€1,500,000 investment in threading equipment
Operating Leverage In the previous problem, what is the degree of operating leverage at the given level of output?What is the degree of operating leverage at the accounting break-even level of output?
Project Analysis You are considering a new product launch. The project will cost £1,700,000, have a four-year life, and have no salvage value; depreciation is 20 per cent reducing balance. Sales are
Project Analysis McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for £700 per set and have a variable cost of £320 per set. The company has spent £150,000 for a
Scenario Analysis In the previous problem, you feel that the values are accurate to within only ±10 per cent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the
Break-Even Analysis Hybrid cars are touted as a green alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the Toyota Prius Hatchback, which had a list price of
Break-Even and Taxes This problem concerns the effect of taxes on the various break-even measures.(a) Show that, assuming straight-line depreciation, when we consider taxes, the general relationship
Operating Leverage and Taxes Show that if we consider the effect of taxes, the degree of operating leverage can be written as Assume straight-line depreciation. Notice that this reduces to our
Sensitivity Analysis In Problem 10.27, suppose youre confident about your own projections, but you’re a little unsure about Italy’s actual machine screw requirement.What is the sensitivity of the
Operating Leverage Use the results of Problem 10.26 to find the degree of operating leverage for the company in Problem 10.27 at the base-case output level of 35,000 units. How does this number
Carry out a full investment appraisal of this project.
Carry out a sensitivity analysis of the project’s NPV. Your main variables of interest are revenue growth rate, working capital percentage of revenues and total variable production cost percentage
Should White Mountain Thyme invest in white whisky? Explain.
What are the two parts of total return?
Why are unrealized capital gains or losses included in the calculation of returns?
What is the difference between a cash return and a percentage return? Why are percentage returns more convenient?
With 20/20 hindsight, what would you say was the best investment for the period from 2005 through 2016?
Why doesn’t everyone just buy small equities as investments?
About how many times did large-company equities return more than 30 per cent? How many times did they return less than–20 per cent?
What was the longest ‘winning streak’ (years without a negative return) for large-company equities?
What do we mean by excess return and risk premium?
What was the real (as opposed to nominal) risk premium on the US large company portfolio?
What was the nominal risk premium on US corporate bonds?The real risk premium?
What is the first lesson from capital market history?
In words, how do we calculate a variance? A standard deviation?
With a normal distribution, what is the probability of ending up more than one standard deviation below the average?
Assuming that long-term corporate bonds have an approximately normal distribution, what is the approximate probability of earning
per cent or more in a given year? With T-bills, roughly what is this probability?
What is the second lesson from capital market history?
If you want to forecast what the stock market is going to do over the next year, should you use an arithmetic or geometric average?
If you want to forecast what the stock market is going to do over the next century, should you use an arithmetic or geometric average?
What are the forms of market efficiency?
Recent Return History Use Table
to calculate the average return over the years 2006–2016 for all the indices presented in the table.
More Recent Return History Calculate the standard deviation for each index using information from Problem 11.1. Which of the investments was the most volatile over this period?
Calculating Yields At the beginning of the year, the price of Anheuser-Busch was €19.67, paid a dividend of €0.28 per share during the year, and had an ending share price of€36.40. What is the

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